How to Perfect - Five Perfection Methods on the UBE / MEE - Secured Transactions

Perfection in Secured Transactions on the UBE / MEE - A Five Headed Monster

Perfection Defined

Perfection is best understood as a publicity device.  Perfection is something that the secured creditor does to put the world on record notice or constructive notice of the secured party’s existence.  In essence, proper perfection helps to protect the secured party from competing creditors. 

How to attain perfection?

There are five methods to attain perfection that could possibly appear on a MEE secured transaction essay.  Two of the five are tested far more often than the other three, noted below. The five ways to achieve perfection are as follows:  1) possession of the collateral by the secured party; 2) automatic perfection (tested heavily); 3) the filing of a finance statement (tested heavily); 4) perfection by “control” and; 5) notation of a lien on the Certificate of Title.

Method One - The secured party takes possession of the collateral.  This method is rather straight forward.  For example, if the collateral used to obtain a loan is made up of two pieces of farm equipment, a tractor and a back-hoe, for instance, should the secured creditor take possession of these two pieces of farm equipment, said secured creditor has “taken possession” of the collateral.  BAR EXAM NOTE – This only works for goods, not intangible items.

Method Two – Automatic perfection for a purchase money security interest (hereinafter “PMSI”) in consumer goods.  To encourage lending to consumers, PMSI in consumer goods are perfected automatically, upon attachment.  What exactly is a PMSI?  It is a security interest that enables the debtor to purchase consumer goods.  For example, Ethan Allen extends $6k in value to the debtor so that he or she can acquire a dining room set.  Ethan Allen takes a PMSI on that bedroom set as collateral.  BAR EXAM NOTE – The credit or loan must actually be used to acquire the collateral.  The funds can’t go into a bank account and then are used to purchase something other than the agreed upon collateral.  The lender must make out a check directly to the seller of collateral.  The exam loves to test this distinction.

Method Three - The most common route to perfection is that the secured party files notice of the security interest in public records.  This proper filing puts the world of potentially competing creditors on record or constructive notice of a filer’s claim.  Notice Filing means that a secured creditor is filing a notice that indicates said creditor may have a security interest in the collateral.

The notice filing contains the following information: 1) Debtor’s name and address (not a trademark but rather the actual name) and if the debtor is an individual, use their unexpired driver’s license name.  If the debtor has a name change, security interest within four months is fine however after four months the debtor must re-file or there will is no proper interest; 2) Description of the collateral just identify collateral, and here, a generic description is fine (all debtor’s property);  3) Secured party’s name and address;  4) Real property related financial statements (mineral, oil or timber rights) must reasonably identify (metes and bounds) the description of the property and;  5)  A signature is not required, one does not have to use a UCC form, any form that qualifies will works. 

Where is the notice filing filed?  If an individual, file in the principal place of residence.  If a corporation, the principal place of business.  If the collateral consists of mineral, timber or oil, the filing is filed in the location of the collateral. BAR EXAM NOTE – There have been issues within secured transaction essays whereby the name and address of the creditor and/or the debtor were not properly made a part of the filing.  Result?  Improper filing.  If a corporation with its PPOB in State B is the debtor and uses 100 acres of fir trees located in State C as collateral, where should the filing be filed?  In State C.  If the fact pattern uses State B (the debtor’s PPOB), the filing is improper.  These are things to look out for on the exam in a secured transaction fact pattern.

Method Four - Perfection by “Control.” This means that the investment property is “controlled” when it can be sold without action from the owner.  Non-consumer deposits can only be perfected by control and one of three ways:  1) The bank has control of the account maintained at its bank, 2) If different bank, debtor gives control when it puts secured party on name of account or 3) agreeing in an authenticated record between, secured party, debtor, and bank that bank must follow secured party’s order without consent of debtor (control agreement).  For example, an “accounts receivable” would fit into this fourth method.  An accounts receivable issue was made a part of the February 2020 examination.

Method Five - Notification of Lien on Certificate of Title. For example, think of a car loan to an individual.  To perfect a security interest in goods subject to a certificate of title statute requiring "lien notation" (for the most part vehicles operated on a highway) a secured party must comply with the demands of the statute for getting its security interest noted on the certificate of title covering the goods.  Perfection by lien notation typically requires a secured party to apply for a title indicating its security interest to the agency responsible for administering the certificate of title statute.

Conclusion

In short, it is imperative for us to know all five methods of perfection.  While two of the five are heavily tested, we know that any of the five may appear on the exam.

Should you have any additional questions about any of the five methods of perfection, attachment, the order of priority or default within secured transactions or another area of the UBE, please do not hesitate to contact us at PassYourBarExam@gmail.com

GOOD LUCK!